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Chapter 2

Chapter 2. Investment Alternatives (Assets). Learning Objectives. types of financial assets non-marketable financial assets money market and capital market securities. options and futures. Non-Marketable Financial Assets. Savings deposits

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Chapter 2

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  1. Chapter2 Investment Alternatives (Assets)

  2. Learning Objectives • types of financial assets • non-marketable financial assets • money market and capital market securities. • options and futures.

  3. Non-Marketable Financial Assets • Savings deposits • Canada Savings Bonds (CSBs) Guaranteed Investment Certificates (GICs)

  4. Money Market Securities • Treasury bills, commercial paper, Eurodollars, repurchase agreements, banker’s acceptances (B/As)

  5. Capital Market Securities Fixed-income securities • Marketable debt with maturity greater than one year • More risky than money market securities • Fixed-income securities have a specified payment schedule • Dates and amount of interest and principal payments known in advance

  6. Fixed-Income Securities • Bonds – long-term debt instruments • Major bond types: • Government of Canada bonds • U.S. Treasury bonds • Provincial bonds • Provincially-guaranteed bonds – Ontario Hydro • U.S. federal agency securities – GNMAs (Ginnie Maes), FNMAs (Fannie Maes)

  7. Fixed-Income Securities • Major bond types (cont’d): • Corporate bonds • Usually pay semi-annual interest, are callable, carry a sinking fund provision, and have a par value of $1,000 • Convertible bonds may be exchanged for another asset • Risk that issuer may default on payments

  8. Asset-Backed Securities • Asset-backed securities are “securitized” assets • E.g. mortgage-backed securities • Investors assume little default risk as most mortgages are guaranteed by a federal government agency

  9. Equity Securities • Represent an ownership interest • Preferred stock • Preferred shareholders are paid after bondholders but before common shareholders • Dividend known, fixed in advance • May be cumulative if dividend omitted

  10. Derivative Securities • Securities whose value is derived from some underlying security • Futures and options contracts are standardized and performance is guaranteed by a third party • Risk management tools • Warrants are options issued by firms

  11. Options • Exchange-traded options are created by investors, not corporations • Call (Put) gives the buyer the right but not the obligation to purchase (sell) a fixed quantity of shares at a a fixed price before a certain date • Options can be sold in the market at a price • Increases return possibilities

  12. Futures • Futures contract: A standardized agreement between a buyer and seller to make future delivery of a fixed asset at a fixed price • A “good faith deposit” called margin, is required of both the buyer and seller to reduce default risk • Used to hedge the risk of price changes

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